An Advisers Highway to Hell – Easy SMSF Legal Recourse

The Superannuation Industry Supervision Act 1993 (SISA 93) is nasty and has the potential of gutting any accountant, financial planner, auditor, broker or other professional who provides the Trustee of a Fund with advice.  And when I mean gut, I mean take a large chunk of change, possibly bankruptcy threatening. All through some simple legal mechanisms that have nothing to do with professional negligence.

You see section 55 of SISA 93 and also section 218 can be used by a Trustee or even a member of a SMSF where they have entertained a loss or outgoing that involves a breach of any of the Fund’s governing rules.  Governing rules is defined in section 10(1) of SISA 93 to include the Fund’s trust deed, Trustee minutes, investment strategy, pension documentation, BDBN and well, anything, written, spoken or unspoken that deals with the management of the Fund.

So if a Trustee of a Fund is fined by the ATO for a section 66 – acquisition of assets from a related party breach then the Trustee of the Fund can sue and recover this fine from the auditor, administrator or adviser to the transaction.  And there is nothing, absolutely nothing the professional can argue except the actual amount of the loss or damages.

Here’s a great one and perilous for all those accountants or administrators that prepare “investment strategies” for SMSF Trustees – print and sign stuff.

Can a Trustee recover Investment Losses from an Accountant, Administrator or Financial Planner?

Years ago, when I was professionally advising, I was asked to review the case of a financial planner who recommended the Trustee of a SMSF to invest in an international managed Fund.  The planner had done the right things and made sure that it was well documented and met the Fund’s investment strategy under s 52B(2)(f) of SISA 93. The auditor, an experienced specialist SMSF auditor, reviewed the Fund’s trust deed and ascertained that the Trustee of the Fund was authorised under the deed to only invest in Australian based assets. This meant the investment in international managed funds, although complying with the Fund’s investment strategy, it did not comply with the deed – pat of the Fund’s governing rules.

Since the time of the investment, the international managed Funds had fallen in value significantly. The Trustee of the Fund was able to dispose of their international investment and recover, in full, all losses from the financial planner and their dealer group as a consequence of the financial planner breaching the Fund’s trust deed pursuant to section 55.  Importantly, liability under s55(3) cannot be mitigated except where the investment is made in accordance with the Fund’s trust deed and investment strategy.

With more and more solicitors and lawyers starting to look for some SMSF action, be careful as this is an easy way to start.  A professional has no defence as it is an offence of strict liability.  If there is a breach and the adviser is involved – well it’s crunch time.  To make things worse as section 55 is also a Commonwealth crime any PI policy is null and void.  So be careful, very careful when it comes to what you do and don’t do and make sure you use strong, secure documentation.